INTERSHIP DISCUSSION- Using image, You should recognize designated tasks that are being completed on this internship and many of those tasks can be viewed as knowledge acquired (day-to-day responsibilities).
Share 1-2 skills you have developed that are directly applicable to this career goal.
-.....:......:..-
188 International Business Strategy
CASE 18
Tata Motors in 2014: Its Multibrand
Approach to Competing in the
Global Automobile Industry
David L. Turnipseed
University of South Alabama
Tata Motors, Ltd.• was India's leading automo-biIe manufacturer by revenue and the number-three passenger-vehicle brand in India in 2012.
However, in 2013 and 2014, the company's name-
sake brand slid into a decline, hath domestically and
internationally, with the company eventually losing
its number-three rank in automobile sales in India
to Honda. Also, the company's sales of commercial
vehicles declined in 2013 and 2014, causing the
company to drop from fourth-largest seller of com-
mercial vehicles to fifth.
Some of the company's poor performance could
be attributed to poor macro-economic conditions
in India, increasing competition, and a variety of
other external factors such as the possible elimina-
tion of diesel subsidies by the Indian government.
However, much of the company's poor performance
was a result of a flawed strategy and poor execution.
For example, it was imperative that the company's
managers consider how to expand the market for
its low-priced Nano, which had required substantial
investment during its development and had fallen
far short of sales expectations. Plus, the company's
entire strategy for its Tara-branded vehicles seemed
to be in disarray.
However, the company's Jaguar Land Rover divi-
sion was achieving great success, with a 23 percent
year-over-year increase in revenues and a 55 percent
year-aver-year increase in profit after tax in fis-
cal 2014. In fact, Jaguar Land Rover accounted for
88 percent of the company's total automotive rev-
enues in fiscal 2014 and 89 percent of its income
John E. Gamble
Texas A&MUniversity-Corpus Christi
before other income, finance cost, tax, and excep-
tional items in fiscal 2014. Tata Motors' manage-
ment would be forced to evaluate its strategy for its
Tata passenger cars, Tata commercial vehicles, and
Jaguar Land Rover division if it was to compete
successfully with the world's leading automobile
producers.
THE HISTORY OF
TATA MOTORS
Tata MOlars was a division of the Tata Group, which
was India's largest corporation, owning more than
90 companies spanning seven business sectors
(chemicals, information technology and communi-
cations, consumer products, engineering, materials,
services, and energy). In 2012, the corporation had
operations in over 80 countries, and it had gross rev-
enues of $83.5 billion in 2011. The company's gross
revenues dipped to $96.8 million in fiscal 2013,
after having reached $100 million in 2012. Nearly
60 percent of the Tata Group's revenues w.
Blowin' in the Wind of Caste_ Bob Dylan's Song as a Catalyst for Social Justi...
INTERSHIP DISCUSSION- Using image, You should recognize designated.docx
1. INTERSHIP DISCUSSION- Using image, You should recognize
designated tasks that are being completed on this internship
and many of those tasks can be viewed as knowledge acquired
(day-to-day responsibilities).
Share 1-2 skills you have developed that are directly applicable
to this career goal.
-.....:......:..-
188 International Business Strategy
CASE 18
Tata Motors in 2014: Its Multibrand
Approach to Competing in the
Global Automobile Industry
David L. Turnipseed
University of South Alabama
Tata Motors, Ltd.• was India's leading automo-biIe
manufacturer by revenue and the number-three passenger-
vehicle brand in India in 2012.
However, in 2013 and 2014, the company's name-
sake brand slid into a decline, hath domestically and
internationally, with the company eventually losing
its number-three rank in automobile sales in India
to Honda. Also, the company's sales of commercial
vehicles declined in 2013 and 2014, causing the
company to drop from fourth-largest seller of com-
2. mercial vehicles to fifth.
Some of the company's poor performance could
be attributed to poor macro-economic conditions
in India, increasing competition, and a variety of
other external factors such as the possible elimina-
tion of diesel subsidies by the Indian government.
However, much of the company's poor performance
was a result of a flawed strategy and poor execution.
For example, it was imperative that the company's
managers consider how to expand the market for
its low-priced Nano, which had required substantial
investment during its development and had fallen
far short of sales expectations. Plus, the company's
entire strategy for its Tara-branded vehicles seemed
to be in disarray.
However, the company's Jaguar Land Rover divi-
sion was achieving great success, with a 23 percent
year-over-year increase in revenues and a 55 percent
year-aver-year increase in profit after tax in fis-
cal 2014. In fact, Jaguar Land Rover accounted for
88 percent of the company's total automotive rev-
enues in fiscal 2014 and 89 percent of its income
John E. Gamble
Texas A&MUniversity-Corpus Christi
before other income, finance cost, tax, and excep-
tional items in fiscal 2014. Tata Motors' manage-
ment would be forced to evaluate its strategy for its
Tata passenger cars, Tata commercial vehicles, and
Jaguar Land Rover division if it was to compete
successfully with the world's leading automobile
producers.
3. THE HISTORY OF
TATA MOTORS
Tata MOlars was a division of the Tata Group, which
was India's largest corporation, owning more than
90 companies spanning seven business sectors
(chemicals, information technology and communi-
cations, consumer products, engineering, materials,
services, and energy). In 2012, the corporation had
operations in over 80 countries, and it had gross rev-
enues of $83.5 billion in 2011. The company's gross
revenues dipped to $96.8 million in fiscal 2013,
after having reached $100 million in 2012. Nearly
60 percent of the Tata Group's revenues were gener-
ated outside India. The Tara Group was a powerful
symbol of India's emergence as a world economic
powerand was India's largest private-sector emplo-
yer, WIth over 425,000 employees. A financial sum-
mary for theTaraGroup for fiscal 20 I0 through fiscal
2013 IS presented in Exhibit I.
COhPYrighte2014 by David L. Turnipseed and John E Gamble
All
ng Is reserved. . .
z
_-----------C-a-se-:-T-a'-a-M-o-'o-rs:.:i:.:n.::2o.::'.::4.:::
l.::ts:::MultlbrandApproach to Competing In the Global
Automobile Indust:.:ry:-4_ ...'1.l8=.9=:.......1
CASE 18 Tata Motors in 2014: Its Multibrand Approach to
Competing in the Global Automobile Industry C-27S
EXHIBIT 1 Financial Summary for the Tata Group, Fiscal 2010-
4. Fiscal 2013
(in billions of U.S. dollars)
, ,
Total revenue $96.79 $100.09 $83.30 $67.40
Sales 95.59 99.10 82.20 65.63
Total assets 10717 108.55 68.90 52.77
International revenues 60.70 59.09 48.30 38.36
Net forex earnings 3.05 1.59 5.80 -0.16
Note: Financial year is April 10 March.
Source; www.tata.ccm,
Tata Motors' history began in 1945 when the
Tata Engineering and Locomotive Company began
manufacturing locomotives and engineering prod-
ucts. In 1948, Tata began production of steam road
rollers, in collaboration with U.K. manufacturer
Marshall Sons. In 1954, the company entered into a
IS-year collaborative agreement with Daimler-Benz
AG, of Germany, to manufacture medium-sized
commercial vehicles. The company began producing
hydraulic excavators in collaboration with Japan's
Hitachi in 1985. The first independently designed
light commercial vehicle, the Tata 407 "pickup," was
produced in 1986, followed by the Tata 608 light
truck. Tata Engineering began manufacturing pas-
senger cars in 1991 and entered into a joint agree-
ment with Cummins Engine Co. to manufacture
high-horsepower and low-emission diesel engines
for cars and trucks in 1993.
In 1994, the company began a joint venture with
Daimler-Benz to manufacture Mercedes-Benz passen-
ger cars in Jndia. Also that year, Tata signed a joint
5. venture agreement with Tata Holset, a U.K. finn, to
manufacture turbochargers for the Cummins engines.
India's first sports utility vehicle, the Tata Safari, was
launched in 1998, and its independently designed
Indica V2 became the number-one car in its segment
in India in 2oot. Also during 2001, Tata exited itsjoint
venture with Daimler-Benz, and it entered into a prod-
uct agreement with U.K.-based MG Rover in 2002.
Tam Engineering changed its name to Tata
Motors Limited in 2003, and in that year the com-
pany produced its three-millionth vehicle. Tara's
stock was listed in the New York Stock Exchange
on September 27, 2004, under the symbol "TTM."
Also in 2004, Tata Motors and South Korea's Daewoo
Commercial Vehicle Co. Ltd. entered into a joint
venture that produced and marketed heavy-duty
commercial trucks in South Korea. Tata Motors
acquired a 21 percent interest in the Spanish bus
manufacturer Hipo Carrocera SA in 2005 and began
production of several new vehicles, including small
trucks and SUVs.
Tata Motors produced its four-millionth vehicle
in 2006. In the same year, it began a joint venture
with Brazil's Marcopolo to manufacture buses for
India and foreign markets, expanded Tata Daewoo's
product line to include tractor-trailer trucks pow-
ered by liquefied natural gas (LNG), and established
three joint ventures with Fiat. The company formed
a joint venture with Thonburi Automotive Assembly
Plant Co. in Thailand to manufacture, assemble, and
market pickup trucks. In 2007, Tata sold all its inter-
est in Tata Holset to Cummins, Inc.
6. In 2008, Tata purchased the iconic British brands
Land Rover and Jaguar, began selling passenger cars
and pickup trucks in the Democratic Republic of the
Congo, and announced iLS "People's Car," named
the Nano. The Nano hit the market in 2009 at a base
price of about $2,250 and won India's Car of the
Year award. Tara began exporting the Nano to South
Africa, Kenya, and developing countries in Asia and
Africa. Also in 2009, Tara purchased the remaining
79 percent of Hipo Carrocera and a 50.3 percent
interest in Milje Grenland/lnnovasjon, a Norwegian
firm specializing in electric vehicle technology. Tata
also entered into an agreement with Motor Develop-
ment International (MOl), of Luxembourg, to develop
an air-powered car. In 2010, the Tata Nano Europa
was set up for sale in developed economies, espe-
cially country markets in Europe.
190 International Business Strategy
C·276 PART 2 Cases in Crafting and Executing Strategy
Tata celebrated its 50th year in international
business in 2011. During that year, the company
announced the opening of a commercial-vehicle
assembly plant in South Africa and a Land Rover
assembly plant in India, Two long-distance buses,
the Tata Diva Luxury Coach and the Tata Starbus
Ultra, were introduced, and two new SUVs-the
Tata Sumo Gold and the Range Rover Evoque-
went on the market. Also in 2011, the upscale Tara
Manza and the Prima heavy truck were launched in
South Africa,
7. During 2011, Tata won two prestigious awards,
which helped bring the company to global promi-
nence. The Jaguar C-X75 won the Louis Vuitton
award in Paris, and the Range Rover Evoque won
Car Design of the Year, The new Pixel, Tata's city-
car concept for Europe, was displayed at the 81st
Geneva Motor Show, and the Tata 407 light truck
celebrated its silver anniversary in 2011, account-
ing for 7 out of every 10 vehicles sold in the light-
commercial-vehicle (LCV) category. The company
began exporting the Nano to Sri Lanka, and it
launched the Tata Magic IRIS, a four- to five-seat
vehicle (top speed of 34 miles per hour) for public
transportation. Also in 2011, the company intro-
duced the Tata Ace Zip, a small "micro truck" for
deep-penetration goods transport on the poor roads
of rural India, and the new Tata Indica eV2, the most
fuel-efficient car in India.
Continuing its innovative operations, Tata signed
an agreement of cooperation in 2012 with Malay-
sia's DRB-HICOM's Defense Technologies. Tata
also introduced its Anti-Terrorist Indoor Combat
Vehicle concept at DEFEXPO-India. The company
brought out three new vehicles at the 2012 Auto
Expo: Tara Safari Storme, a large SUV; Tata Ultra,
a light commercial vehicle (truck); and Tata LPT
3723, a medium-duty truck and India's first five-
axle rigid truck. The air-powered car developed
with Luxembourg's MDI was showing promise
and would possibly serve a large market niche that
wanted ultra-economical transportation.
In fiscal 2014, the company launched two com-
pact car models: The Zest was designed to compete
with the Suzuki DZire, Hyundai Xcent, and Honda
8. Amaze. The Bolt, a smaller version of the Zest, was
positioned against the Suzuki Swift, Honda Brio,
and Hyundai Grand i10.Tala also introduced 10new
products in its Prima truck series and launched its
new Ultra line of intermediate light trucks,
Tata Motors' joint ventures, subsidiaries, and
associated companies are presented in Exhibit 2,
Consolidated income statements and balance sheets
for Tata Motors are presented in Exhibits 3 and 4,
respectively.
MACROECONOMIC
CONDITIONS IN INDIA
India was the seventh-largest nation in area, with
about one-third the land size of the United States. As
of 2013, it was the second-mast-populous country
on Earth, with 1,2 billion people (versus the United
States with 319 million). The average age in India
was 27 years (39 in the United States), and the popu-
lation growth was 1.3 percent per year (0.77 percent
in the United States); however, 29.9 percent were
below the poverty line in 2013, The Indian gross
domestic product (GDP), adjusted for purchasing
power parity, in 2014 ranked fourth in the world,
at about $4.99 trillion, and was growing at about
3.2 percent per year (the 108th-highest growth rate in
the world). Indian per capita GDP was about $4,000
in 2013 (versus $48,000 in the United States).
India's economy recovered well from the global
recession, primarily because of strong domestic
demand, with economic growth over 8 percent.
However, in 2011, this growth slowed due to the
lack of progress on economic reforms, high interest
rates, and continuing high inflation, and it averaged
9. 5 percent in 2012 and 2013. Also, a slowdown in
key sectors of the economy such as manufacturing
and mining, as well as growth in developed mar-
kets, made India less attractive for foreign inves-
tors. The exchange rate for the Indian rupee was
53 per U.S. dollar in 2012. It then dropped almost
25 percent against the dollar, and although it
recovered somewhat, the rate was still down about
12percent at the beginning of2014. By June 2014,
the rupee was trading at approximately 60 rupees
per U.S. dollar,
The Indian government subsidized several fuels
(including diesel, which is a component in its infla-
tion index), and as crude prices remained high, the
fuel subsidy expenditures caused an increasing fis-
cal deficit and current account deficit. Between 20 I0
and 2012, India suffered from numerous serious cor-
ruption scandals that sidetracked legislative work,
and as a result, little economic reform occurred.
r
-J __------------..:c.:.as::e-: T..::ataMotorsin 2014:Its Multibrand
Approach to Competing Inthe Global Automobile Industry 191
CASE 18 Tata Motors in 2014: Its MultibrandApproachto
Competing Inthe GlobalAutomobileIndustry
EXHIBIT 2 Tata t-'1otors' Joint Ventures and Subsidiaries, 2014
Tata Motors has a 51percent share in ajont venture with
Marcopolo (49 percent), the Brazil-based maker of
bus and coach bodies. Tata Motors (SA)(Proprietary) Ltd.isTata
Motors' Joint venture with Tata Africa Holding
(Pty) Ltd; the JOintventure's assembiy plant at Rosslyn,Pretoria,
10. assembles light.medium, and heavy commercial
vehicles ranging from 4 to 50 tons from semi-knocked-down
kits. Other associates include the following:
Tata Daewoo Commercial Vehicle Company is a 100 percent
subsidiary otTata Motors in the business of heavy
commercial vehicles (www.tata.daewoo.c;om).
Tata Motors European Technical Centre is a U.K.·based, 100
percent subsidiary engaged in design engineering and
development of products.
• Telco Construction EqUipment Company makes construction
equipment and provides allied services (www.telcon.co.in/).
Tata Motors has a 60 percent holding; the rest is held by Hitachi
Construction Machinery Company, of Japan.
Tata Technologies provides specialized engineering and design
services, product life-cycle management, and
product-centric information technology services
(www.ti.tatec:hnologies.coml).
Tata Motors (Thailand) Ltd, is a joint venture between Tata
Motors (70 percent) and Thonburi Automotive Assembly
Plant Co, (30 percent) to manufacture and market the company's
pickup vehicles in Thailand (www.tata",otors
.'G.th!).
• Tata Cummins manufactures high-horsepower engines used in
the company's range of commercial vehicles,
HVTransmissions and HV Axles are 100 percent subsidiaries
that make gearboxes and axles for heavy and medium
commercial vehicles
TAL Manufacturing
Solution
11. s is a 100 percent SUbsidiary that provides factory automation
solutions and designs and
manufactures a wide range of machine tools (www.tal.co.in/).
Hispano Carrocera is a Spanish bus manufacturing company in
which Tata Motors acquired a 100 percent stake in
2009 (www.hispano-net.coml).
Concorde Motors is a 100 percent subsidiary retailing Tata
Motors' range of passenger vehicles
(www.concordemoton.com/).
Tata Motors Finance is a 100 percent subsidiary in the business
of financing customers and channel partners of
Tata Motors (www.tmf.co.in).
C-277
:i'
111
Despite the scandals. poor infrastructure, a lack
of nonagricultural employment, limited access to
education, and the rapid migration of the popula-
tion to unprepared urban centers, growth over the
next three to five years was projected to approach
7 percent. The Reserve Bank of India suggested
12. that inflation, which had ranged between 7 and
10 percent since 2009, dropped to 6,6 percent in
early 2012. However, the inflationary situation wors-
ened in 2013, with inflation reaching 11.2 percent,
due in large part to energy prices. There was the very
real probability that spikes in crude oil prices could
brine additional inflation to India.
Education was highly valued in India, and the
Indian workforce was well educated, which allowed
India to become a major provider of engineering,
design, and information technology services. How-
ever~ continuing problems such as slgniflcant ov~r-
population, environmental degradatIOn, e~tenslve
poverty, widespread corruption, an,d the Sl?~l1~~eco-
nomic development were hampenng India S lise on
the world stage and putting downward pressure on
its domestic automobile industry.
OVERVIEW OF THE
AUTOMOTIVE INDUSTRY
IN INDIA
The automobile industry in India had evolved dur-
ing three relatively unique periods: protectionism
13. (until the early 1990s), economic liberalism (early
1990s-2007), and then a period of globalization.
The protectionist years were characterized by a
closed economy with high duties and sales taxes.
The automobile industry at that time was a seller's
market with long waits for automobiles.
The period of economic liberalism that began in
the early 1990s included the deregulation of indus-
tries, the privatization of state-owned businesses, and
reduced controls on foreign trade and investment,
which increased the entry of foreign businesses, This
, 92 lnternationa~s ~ategy~ _
C-278 PART 2 Cases in Crafting and Executing Strategy
EXHIBIT 3 Tata Motors' Summarized Profit and LossStatement.
Fiscal 2011-
Fiscal 2014 (in core rupees, or 10 million rupees")
Income 170,677.6 126,414.2
Revenue from operations 234,469.9
14. 193,584.0
Less: Excise duty 3,729.6
4,766.3 5,023.1 4,286.3
230,677.1 188,817.6 165,654.5 122,127.9
Other income 2,156.6
611.5 661.8 429.5
232,833.7 189,629.2 166,316.3 122,557.4
Expenditures
111,600.4 100,797.4 70,453.7Cost of materials consumed
135,550.0
Purchase of products for sale 10,876.9 11,752.1
11,205.9 10,390.8
Changes in inventories of finished goods,
(2,840.6) (3,031.4) (2,535.7) (1,836.2)work-In-progress, and
product for sale
Employee cost/benefits expense 21,556.4 16,584.1
15. 12,298.5 9,342.7
Finance cost 4,733.8 3,553.3
2,982.2 2,385.3
Depreciation and amortization expense 11,076.2 7,569.3 5,625.4
4,655.5
Product development expense/engineering
2,565.2 2,021.6 1,389.2 997.6expenses
Other expenses 43,625.8 35,535.6
28,454.0 21,703.1
Expenditure transferred to capital and other
(13,537.9) (10,192.0) (8,266.0) (5,741.3)accounts
Total expenses 209,074.1 175,393.0 151,950.9
112,351.22
Profit before exceptional items, extraordinary
14,236.2 14,365.4 10,206.2Items, and tax 19,854.4
Exchange loss (net) including on revaluation of
515.1 654.1 (231.0)foreign currency, borrowings, deposits, and
16. loan 707.7
Impairment of intangibles and other costs 224.1 87.6 177.4
Profit before tax from continuing operations 18,868.9 13,633.5
13,533.9 10,437.2
Tax expense/(credit) 4,764.8 3,771.0 (40.0) 1,261.4
Profit after tax from continuing operations 14,104.2 9,862.5
13,573.9 9,220.8
Share of profit of associates (net) (53.8) 113.8 24.9 101.4
Minority interest (59.5) (83.7) (62.3) (48.5)
Prolit lor the year 13,991.0 9,892.6 13,516.5 9,273.6
-Exchange rate: US$1 :> Rs54.45 for 2012-2013, 47.53 lor
2011-2012, and 47.41 for 2010-2011.
Source: Tats Motors annual reports, 2011, 2012, 2013, and
2014.
period triggered economic growth that averaged
17. over 7 percent annually between 1997 and 2011.
During the economic liberalization period, automo-
bile financing greatly expanded, and the automobile
market became more competitive.
Auto sales in India reached record levels in the
first quarter of 2012, as consumers increased their
purchasing-primarily of diesel vehicles-due to
concerns that the government would raise taxes on
diesel vehicles in the next fiscal year. Increased loan
rates and higher fuel prices in 2011 reduced the
demand for cars; however, the boom in diesel sales
lifted overall sales to a new high of 211,402 autos in
April 2012. The demand for diesel vehicles grew to 45
percent of total demand, up from 30 percent in 20 IO.
Diesel was more fuel-efficient than gas, and the Indian
._--------------- -
Case: Tata Motors in 2014'It M I lb. s uti rand Approach to
Competing in the Global Automobile Industry
18. CASE 18 Tata Motors in 2014: Its Multibrand Approach to
Competing in the Global Automobile Industry
EXHIBIT 4 Tata Motors' Consolidated Summarized Balance
Sheets
Fiscal 2011-FiscaI2014 (in core rupees, or 10 million rupees")
C·279
Assets
Fixed assets 97,375.4 69,483.6 56,212.5 43,221.1
Goodwill 4,978.8 4,102.4 4,093.7 3,584.8
Noncurrent investments 1,114.4 1,222.4 1,391.5 1,336.8
Deferred tax assets (net) 2,3471 4,428.9 4,539.3 632.3
Long-term loans and
advances 13,268.8 15,465.5 13,658.0 9,818.3
Other noncurrent assets 5,068.5 1,024.0 574.7 332.3
Foreign currency monetary
item translation difference
account (net) 451.4
Current assets 95,845.3 74,006.7 64,461.5 42,088.8
Total assets 219,998.3 170,026.5 145,382.6 101,014.2
Liabilities
19. Long-term borrowings 45,258.6 32,110.1 27,962.5 17,256.0
Other long-term liabilities 2,596.9 3,284. I 2,458.6 2,292.7
Long-term provisions 12,190.3 8,319.2 6,071.4 4,825.6
Net worth
Share capital 643.8 638.1 634.8 6377
Reserves and surplus 64,959.7 36,999.2 32.515.18 18,533.8
Minority interest 420.6 3075 3071 246.6
Deferred tax liabilities (net) 1,572.3 2,019.5 2,165.1 2,096.1
Current liabilities 92,356.1 86.285.90 73,268.1 55,125.6
Total liabilities 219,998.3 170,026.5 145,382.6 101,014.2
-Exchange rate: US$1 "" Rs54.45 for 2012-2013, 47.53 for
2011-2012, and 47.41 for 2010-2011,
Source: Tata Motors annual reports, 2011, 2012, 2013, and
2014.
government instituted controls on the price of diesel
because of its impact on inflation. In the first quarter
of 2012, diesel was 40 percent cheaper than gasoline.
In 2012, the trend for the industry turned down,
with domestic sales of automohiles falling by
6.7 percent-the first decline in a decade. In 2013,
20. sales were down an additional 4.6 percent. Sales of
commercial vehicles were hit even harder, declin-
ing 20.2 percent from the prior year. In his inves-
tor presentation in 2013, Tara's managing director,
Karl Slym, emphasized the impact of the Indian
government's banning mining in the Karnataka
region. This ban impacted 200 mines and resulted
in idling about 17,000 to 20,000 heavy trucks,
which severely reduced the replacement demand
for these trucks.
Ongoing national urban and rural highway proj-
ects through 2014 had been expected to increase
national and state highways by 110,000 kilometers
(68,350 miles) and rural roads by 411 ,000 kilometers
(255,000 miles). This large increase in roads was
also expected to increase the demand for cars, espe-
cially the more affordable models targeted at rural
customers, However, many of the infrastructure
projects were put on hold due to India's economic
downturn, The almost certainty of increasing fuel
21. 194 International Business Strategy
C·280
PART 2 Cases in Crafting and Executing Strategy
prices would force successful automakers to focus
on increasing fuel efficiency and to search for alter-
native fuels, which was one of Tata's competencies.
TATA MOTORS' BUSINESS
STRATEGY IN 2014
Tata Motors' Strategy
in Passenger Cars
Tata Motors' management believed that future growth
for the company's subsidiaries would come from
both investments in India and opportunities in inter-
national markets. Management also believed that
OleIndian passenger-car industry would recover and
experience strong growth over the next 10 years and
that it would become the third-largest passenger-ear
market (after the United States and China) by 2021.
Tata Motors' strategy for its passenger-car divi-
sion was keyed to leveraging its broad product
line and concentrating on all-around value, includ-
ing Fuel efficiency. The company offered compact-
22. sized Indica and midsized Indigo passenger cars
for sales primarily in India, although the company
also exported passenger cars to parts of Europe and
Africa. Tara's passenger cars were powered by 1.2-
to lA-liter gasoline and diesel engines, and its lineup
also included the electric-powered Indica Vista. The
division also produced the widely publicized Nano
microsized car.
The passenger-vehicle strategy focused on
aggressive growth of new vehicle sales, service loca-
tions, and growth in the used-car business through
Tata Motors Assured operations. Tata management
believed that a better sales and service network
would enhance customer care and increase sales.
The Jaguar and Land Rover brands were targeted
for international growth in developed markets and
such key emerging markets as China, Russia, and
Brazil. China was expected to increase its share
of auto sales volume among the four BRIC coun-
tries (Brazil, Russia, India, and China) from 53 to
61 percent, and Brazil, which was the most stable
and mature of the four countries, was expected to
remain in second position. Equally as important
as the BRIe countries' economic resilience, their
23. passenger-car penetration was extremely low: The
number of cars per 1,000 persons in Brazil was 259;
Russia, 200; China, 44; and India, 13. Managing
Director Karl Slym felt that these countries had
great futures as markets for Tara's passenger ears.
However, the company's sales of automobiles in
India declined by 37 percent between 2013 and
2014, and its exports of automobiles failed to
grow during 2014. According to Slym's analysis, the
BRIC nations were expected to account for 30 per-
cent of global auto sales in 2014.
The "People's Car" - Tata Nano
In 2009, even though India's population was the
second-largest on Earth and its economy was rapidly
growing, there were only 12 cars per thousand people
(compared to 56 per thousand in China, 178 per thou-
sand in Brazil, and 439 per thousand in the United
Slates). In contrast, there were over 7 million scoot-
ers and motorcycles sold in India that year. The two-
wheel-vehicle sales were the result of India's large
population, high urban density, and low income
level. Tata Motors recognized the huge market for
very low-cost motorized transportation that was
24. being filled by scooters and motorcycles.
The middle-class household income in India
started at about $4,500 in 2007. Tala believed that
a car costing about $2,500 would be able to take
advantage of the very large market that was being
served only by two-wheel vehicles. In 2007, about
7.75 million Indians owned automobiles; however,
more than 17 million others had the financial ability
to purchase an automobile. Tara Motors' manage-
ment believed that the potential market for auto-
mobiles priced under $3,000 could grow to about
30 million consumers in India. Tata Motors cre-
ated the Tata Nano to capture such demand for low-
cost automobiles and switch a large portion of the
demand for two-wheel vehicles to the Nano.
Ratan Tata, the chairman of Tata Motors' board,
viewed the Nano as the "People's Car." Mr. Tata
once remarked about the many families riding on
scooters: The father would drive with a child stand-
ing in front of him and the mother seated behind
him, holding a baby. The Nano was intended to be
the means to keep Indian middle-class families from
transporting the entire family on one scooter. The
25. Nano was widely anticipated in India, and it was
projected that the Nano might have an effect on the
used-car market because of its low price.
Tata Motors began the Nano design with a com-
prehensive study of the potential customers and their
.-...._------------ c
Case: rata Motors in 2014: Its Multibrand Approach to
Competing In the Global Automobile Industry
---,lo- ..............--011
CASE18 Tata Motorsin2014: its MultlbrandApproachto
Competing Inthe GlobalAutomobileIndustry C.281
needs, wants, and purchasing ability. In a unique
pricing approach, the company set the base price at
$2,500, which was the price Tata thought its custom-
ers could pay, and worked backward into the design.
The base price at introduction was about $2,000;
however, it quickly went up to $2,300, and by 2012,
the price was about $2,600. A typical 2014 Nano
26. model is presented in Exhibit 5.
The base Nano model had a 625-cubic-centimeter,
two-cylinder engine that produced a top speed of
65 miles per hour and offered gas mileage of nearly
50 miles per gallon. The small engine was well-
matched to the driving conditions in urban mar-
kets in India, which were characterized by crowded
streets with an average speed of less than 20 miles
per hour. The base Nano model did not include air
conditioning, a radio, or a CD player, and access to
the trunk was through the interior-s-there was no
trunk door on the outside of the vehicle. Every pos-
sible cost-saving measure was implemented: There
EXHIBIT 5 The 2014 Tata Nano
were only three lug nuts on the wheels, no airbags,
and one windshield wiper, and the speedometer was
in the middle of the dash rather than behind the steer-
ing wheel, which saved on pans and reduced cost. A
supplier of suspension parts used a hollow steel tube
to replace the solid steel tube normally used so as to
saveon steel costs.
27. The Nano was manufactured using a module
design, which allowed components to be built sep-
arately and shipped to a location where they could
be assembled. Tata Motors created a geographically
dispersed network of Nano dealers in developing
countries such as Brazil, China, Malaysia, Nepal,
Bangladesh, Nigeria, Myanmar, and Indonesia. Tata
Motors' distribution network also included dealers
in the Middle East, South Africa, and the African
continent.
Despite very high expectations, Nano sales
were less than expected after its introduction. Sales
for calendar year 2010 were 59,576. Unit shipments
196 International Business Strategy
C·282
PART 2 Cases in Crafting and Executing Strategy
increased to 70,432 in 2011 and 74,527 in 2012
before falling to 53,847 in 2013 and 21,130 in 2014.
Analysts estimated that approximately 200,000 to
28. 250,000 Nanos per year would need to be sold for
Tata Motors to achieve an acceptable return on its
$400 million investment in the Nano's development.
The potential of a low-priced car in the global
automobile marketplace was widely recognized, and
several potential competitors had plans to enter the
market. There were rumors in the industry that Gen-
eral Motors (GM) was working with Wuling Auto-
motive in China to design and produce a car that
would directly compet.e with the Nano. Ford opened
its second plant in India in 2011 and invested over
$2 billion in its manufacturing facilities in India.
Ford's new Figo offered features close to those of
American cars at a price of slightly over $7,000 for
the base model. Volkswagen also opened a manu-
facturing plant in India and was selling its base VW
Polo for $8,495, which was well equipped compared
to the Nano and Ford's Figo. France's Renault also
offered an economical car, the Pulse, which was
very well equipped, for about $7,850. In turn, Nis-
san sold it.sMicra for about $7,650, Maruti offered
the Ritz for $7,500, and Chevrolet put out the Beat,
priced at $8,030.
29. These competitors, plus a reported Nano defect
that could cause the vehicle to catch fire, combined
to depress sales. However, Tata was determined to
make the Nano a success. Tara was rumored to be
redesigning the Nano for export to the United States.
The cost of adjusting the Nano to meet American
standards and the costs of emissions control, power
steering, a larger engine, and more options would
drive the price of the Nano to about $8,000. How-
ever, the $8,000 price would make t.he Nano the
least expensive new car in the United States-less
than either the Nissan Versa ($11,800) or the Hyun-
dai Accent. ($13,205).
At the Auto Expo in Delhi in 2014, Tata pre-
sent.ed its new Nano Twist Active. This Nano had a
new front grill and a more st.ylish design. It featured
a tailgate, which allowed access to the trunk from
the outside, power steering, keyless entry, Bluetooth
connectivity, and six new bright colors. The new
Nano Plus had a larger engine, front disc brakes,
improved air conditioning, a newly designed dash-
board, fog lights, LED headlights, bucket seats, and
an operational tailgate. Tata was expected to offer
a diesel Nano in the near future. Although it was
30. originally launched as the world's least e~p~nsive
car, the redesigned Nano was named India s Most
Trusted Automobile" by The Brand Trust Report,
India Study 2014, published by the Comniscient
Group Company.
Although the initial launch of the Nano in 2009
did not produce the desired level of sales, Tara was
clearly not giving up on the world's least expensive
car, now repositioned as the car of the stylish youth.
Safety, however, is apparcntly a big concern of
lower-income buyers as well as more affluent cus-
tomers. The poor safety ratings of the Nano and the
lack of airbags continued to hold down sales. Tata
appeared determined to salvage the Nano, and the
second launch of the redesigned and improved auto-
mobile may prove to be the key to the car's success.
Commercial Vehicles
Tata's commercial-vehicle strategy focused on pro-
viding a wide range of products that offered the
lowest cost of ownership for truck users in devel-
oping countries. Tara's strategy was to continuously
evaluate its entire commercial product range with
31. the intent of offering a very strong combination of
existing products and new commercial platforms
and products. Tara Motors offered small commer-
cial vehicles that could be used for local deliveries,
light pickup trucks, and light commercial vehicles
capable of carrying larger payloads. The company
also produced a full line of large buses and coaches,
as well as medium and heavy commercial vehicles
suitable for long-haul trucking.
Growth in international markets was a strategic
priority, which Tata planned to address by combin-
ing and expanding its international manufacturing.
The company opened an assembly plant in South
Africa in 2011 and was considering additional
capacity expansion. Tala'S commercial-vehicle strat-
egy included plans to refurbish commercial vehicles,
sell annual maintenance contracts, and provide parts
and services to the defense department in India.
However, Tata MOlars' exports of commercial vehi-
cles declined by 2 percent from 44 109 in 2013 to
43,083 in 2014. '
The commercial division planned to invest up to
1,500 core rupees (US$325 million) in fiscal 2015 to
32. develop new products and technologies for its com-
mercial segment. The company had sufficient manu-
facturing capability for the next five years: It focused
.-...---------------- -
Case: Tata Motors in 2014: Its Multibrand Approach to
Competing in the Global Automobile Industry 197----.r-.---------
---~.:.:::::.:..=~.::::::~~:":'.:~~~~~~~~~~_1L!J!jL.J
CASE18 Tata Motors in 2014: Its MultibrandApproach to
Competing in the GlobalAutomobile Industry C.283
its capital on technology and new products so that its
portfolio would be ready when the market improved.
Tata launched a new low-priced truck, the Prima LX,
in March 2014, and in the first quarter of2014-2015,
the company launched the Magic Iris, a three-seat
automotive vehicle designed as a rickshaw replace-
ment. New buses and new models of the Tata light-
commercial-vehicle Ultra were also planned for
fiscal 2015. Tata was working with Cummins diesel
to develop a new series of engines to power several
33. of its commercial vehicles, including the Ultra LCY.
Tata's strategy included a commitment to qual-
ity and the lowest total cost of ownership. This was
to be achieved by drawing on the company's in-
depth knowledge of the Indian market and lever-
aging its development and design capabilities. The
company planned an increased customer-centric
operation, which was to be accomplished by a focus
on customer services throughout the entire product
life cycle, the use of customer relationship technol-
ogy, and an increase in the availability of customer
financing. However, thesestrategies and tactics were
failing in 2014, with the division's unit shipments
declining by 30 percent from 2013 volumes.
Jaguar and Land Rover
The Jaguar and Land Rover (JLR) brands were in a
separate division within Tata Motors and had a sig-
nificantly different target market than Tata-branded
passenger cars. Tata Motors' strategy for JLR was
to capitalize on growth opportunities in the pre-
mium market segments with the two globally rec-
ognized brands. The strategy included achieving
additional synergy and benefits with the support of
34. Tata Motors. There were plans for substantial invest-
ment in new JLR technologies and products, more
competitive powertrain combinations, and new body
styles. Revenues for the JLR division had increased
by 23 percent from 2013 to 2014. The division's
EBITDA improved by 41.6 percent between 2013
and 2014, and its after-tax profit improved by 37.3
percent between those years. The Jaguar Land Rover
division contributed 88 percent ofTata Motors' total
automotive revenue in fiscal 2014 and 89 percent of
its income before other income, finance costs, tax,
and exceptional items in fiscal 2014.
The division's unit sales increased from 314,433
in 2012 to 372,062 in 2013 to 429,861 in 2014. The
division's rise in sales and profitability was largely
a result of the growing popularity of its Land Rover
brand, which included the Defender, LR2, LR4,
Range Rover Evoque, Range Rover Sport, and Range
Rover models. Land Rover sales accounted for
82.8 percent of the luxury division's unit sales
in 2013 and 84.5 percent of the division's sales in
2014. While Jaguar's XF and XJ sedans struggled to
compete against BMW, Mercedes, and other luxury
35. performance sedans, its XK and F-Type coupes and
convertibles hadreceived stronginterestamong luxury
sports car enthusiasts. Unit sales for the Jaguar brand
increased by 37 percent between 2013 and 2014.
Land Rover's strong performance led to the
announcement of a new $392 million factory to be
located in Brazil. The new plant would have a capac-
ity of 24,000 cars per year, and production was
expected to begin in 2016. Much of Jaguar Land
Rover's growth had come from China, which bought
25 percent of the division's production. China had
become Jaguar Land Rover's largest market: Jaguar
sales more than doubled in China in fiscal 2014, and
Land Rover sales increased by 23 percent. The large
demand for Jaguars and Land Rovers had required
the company to operate the three factories in the
United Kingdom 24 hours a day. The new Jaguar
Land Rover factories that were being built in China and
Brazil would increase capacity by about 50 percent.
A plant was also scheduled for Saudi Arabia.
TATAMOTORS' SITUATION
IN 2014
Tata Motors' management enjoyed a record-setting
36. year, with revenues for the fiscal year-end March
31,2014, increasing by 21 percent compared to the
prior year. The increase was driven by the grow-
ing success of its Jaguar and Land Rover acquisi-
tions, with combined sales of the two luxury brands
increasing by nearly 23 percent during the past
12 months. However, the sales of its Tara-branded
automobile and commercial vehicles fell by 31 per-
cent during the year, with both domestic sales and
exports suffering.
Problems at Tata Motors continued into fis-
cal 2015, with commercial-vehicle sales declining
24.5 percent during the first two months compared to
the same period in fiscal 2014. In addition, the Nano,
hailed by Businessweek in 2008 as a tale of "innova-
tion and ingenuity," had not lived up to expectations.
198 International Business Str:at:e;:9Y':- _
C·284 PART 2 Cases in Crafting and Executing Strategy
Even in the domestic market, consumers were not
37. buying the tiny car with a poor track record for reli-
ability. Strong demand for Honda's diesel sedans
Amaze and City pushed Honda past Tata (and Ford
India), making it the number-three passenger-car
manufacturer. Tara's compact brand Indica had poor
sales because it was perceived as a fleet car, and the
Nano was perceived as a poor man's car.
Also, the death of Managing Director Karl
Slym, head of Tata's domestic operations, had dis-
rupted the company's stability. Slym, a former GM
executive, had been with Tata only two years but
had been instrumental in developing a business plan
to address the declining sales of its Tara-branded
vehicles and expand into new international markets,
especially the BRIC countries.
Following the death of Slym, Tara's manage-
ment stated that the company would continue to fol-
low Slym's turnaround strategy by introducing two
new cars: the Bolt hatchback and the small Zest.
There was hope among management that Tata's new
Bolt and Zest compact cars, plus another new com-
pact model with the code name Kite, which were
scheduled to be introduced in late 2015, would be
38. better able to compete against the three market lead-
ers in the compact market. As Tata's management
looked further into the 2015 fiscal year, there was
a promising domestic market for motor vehicles as
well as attractive markets around the world. The
company's management team would be forced to
make further strides to truly become a contender in
the global automobile industry .
..-..::..-_---------------
__ ------------------------------
~G~IO'.':ba~liz~a~ti.".on~of~HC1:y~a~tt~P:la~c:e:'_'_JL.-
J11.x:!ggL..J--
i'IVEy I PUblishing
9814M070
GLOBALIZA TION OF HYATT PLACE1
Gevor!< Papiryan wrote this case solely to provide material for
class discussion. The author does not Intend to Illustrate either
effective or Ineffective handling of a managerial situation. The
40. hotel corporation was scheduled to open
more than 140 additional Hyatt Place hotels that year and the
next in the United States as many
AmeriSuites properties continued to undergo renovation and
repositioning under Hyatt's newest select-
service brand.
After acquiring AmeriSuites and rebranding it, the leadership of
Global Hyatt Corporation was also
thinking about the internationalization of new brands. "Growth
potential in the upscale limited service
category is significant both in the U.S. and internationally.
Hyatt will analyze opportunities for expanding
the new brand in strategic markets around the world,"
announced Steve Goldman, Hyatt's executive vice-
president of acquisitions and development.'
In 2011, Hyatt Hotels Corporation announced that its select-
service brands were expanding
internationally, Among other issues, the leadership of the
corporation now needed to find answers for
several questions: What modes of entry should be used in brand
internationalization? How should new
internationalization opportunities be pursued for Hyatt Place
while maintaining the company's premium
41. brand?
HYATT HOTELS CORPORATION
Hyatt's several hundred properties were owned through a web of
private holdings controlled by three
generations of Chicago's Pritzker family, whose head, Jay
Pritzker, had purchased Hyatt von Dehn's
share of Hyatt House on September 27, 1957.'
j This case has been written on the basis of published sources
only .. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Hya~t
H,0telsCorporation o~any of Its employees.. ~
2 "Hyatt Corporation Announces Acquisition of AmenSUltes
Hotels; Formation of Global Hyatt Corporatton Progresses,
hospitalitvnet December 9, 2004,
www.hospitalltynet.orglnewsl4021529.html. accessed May
16,2014.
j Michel Santoli, -Hyatt's Travelin' Man, - Barron's July
14,2012,
http://onJine,barrons,comlnewsiarficleslSB50001424053111904
18450457751 8974208186512, accessed May 16, 2014.
42. 200 International Business Strategy
9B14M070
Page 2
Over the following decade, Jay's younger brother Donald was
responsible for the day-to-day operations
and Jay for the financial strategy and acquisitions. They made
Hyatt the fastest-growmg hotel cham m the
United States. After Donald's death in 1972, Jay continued the
business and shaped Hyatt rnto a major
competitor in the hospitality industry.
In 1969, Hyatt opened its first overseas hotel, the Hyatt
Regency Hong Kong. The Hyatt Regency M~ui,
which the company opened in 1980, was the company's
groundbreakmg resortwas·destmation concept. In
1980, Hyatt introduced its higher-level service brands Grand
Hyatt and Park Hyatt.
In June 2004, all of the hospitality assets owned by Pritzker
family business interests, including Hyatt
Corporation and Hyatt International Corporation, were
consolidated under a single entity called Global
43. Hyatt Corporation. This created a hospitality company with a
single balance sheet, a single organization
and a single focus. On June 30, 2009, Global Hyatt Corporation
changed its name to Hyatt Hotels
Corporation. The company ranked among the world's top hotel
corporations with the highest total sales.'
To help disentangle these holdings, the family called on Mark
Hoplamazian, a Pritzker executive and
honorary family member. Navigating the family's fractious
politics, Hoplamazian worked to weave
together the multiple strands of the hospitality business now
known as Hyatt Hotels. As the CEO since
2006, he also shepherded the company through its late 2009
initial public offering and oversaw its
subsequent growth into a multi-brand lodging firm.'
In 2006, Global Hyatt Corporation created two select-service
brands, Hyatt Place and Hyatt Summerfield
Suites. In 2007, Hyatt introduced its Andaz brand and opened
its first hotel without the Hyatt name - the
Andaz Liverpool Street in London, England. Despite its brand
awareness, the company was 10th in the
list of the top worldwide hotel groups with the greatest number
of rooms (see Exhibit I).
44. As of the beginning of20 II, Hyatt Hotels Corporation managed,
franchised, owned and developed Hyatt-
branded hotels, resorts and residential and vacation ownership
properties around the world. The
company's worldwide portfolio consisted of 453 properties in 45
countries, under brand names that
ranged from the ultra-luxury Park Hyatt and upscale Grand
Hyatt and Hyatt Regency to the lower-
category Hyatt Place and Hyatt House. The company's net
income was $66 million (see Exhibits 2.7).'
China and India werethe second- and third-largest markets for
Hyatt Hotels Corporation, after the United
States. Hyatt opened Its first overseas hotel, the Hyatt Regency
Hong Kong, in 1969. Before 20 II Hyatt
had 11 hotels in China in first-tier cities such as Beijing, Hong
Kong, Macau, Shanghai, Shenzhen and
Taipei, In 20I0, Hyatt had 22 properties under development in
China across all of its full-service brands
including Andaz..Of the 22 properties under development, four
properties - the Park Hyatt Ningbo,
Hyatt Regency Jman, Hyatt Regency Guiyang and Hyatt
Regency Qingdao - were slated to open in
20II, with an additional nine properties expected to open in
45. 2012'
4 Sonia Isotov, "Hyatt Regency Maui Completes $15 Million
Transformation· Mau; F b 1 2011,
http://mauinow.coml2011 10211O/hyatt-
regency~maui..completes.15-million.transforma·tlon
acnow.c~%e 16ruary 0,
s G P' ON I tn GI b I H t ' cesse ay ,2014. aplfyan, 0 e on e, 0 a
0 al Industry, • {vey Business School . 8
https:l/wwvuveycases.comlProductVlew.aspx?id=10904,
accessed May 17 2014 case, # 9B08M028, 200,
e Michal Santoli, op. cit, ' .
7 Annual Report of HHC, 2010,
http://investors,hyatt.comIPhoenix.zhtml?c=2289S9&p-irol
_2014, . - -reoonsennust, accessed May 17,
a ~HyattBuilds on 41 Year History in Greater China with Plans
for Hotels in Emerging cr d . . •
Investor Relations October 13 2010 J las an Resort Destmatlons,
Hyatt
http://investors.hy~tt. comlEx te~nal.File ?t=2&item=g 7rqBL
VLuv81 UAmrh20Mp 1 WshOli ZRIU
mJTufa59NKgILWCr02Kg52uNxGjdg==. accessed May
17.2014. u rqeVIOTERngYX3qlLLZyqYnPm
..-...:.-_------------- -
46. Globalization of Hyatt Place
.---- 201
Page 3 9814M070
Hyatt had been managing hotels in India since May 1983 and
was one of the oldest international hotel
brands in the country. Its first hotel in India was the Hyatt
Regency Delhi. Over the last few years, the
company had introduced the Park Hyatt, Grand Hyatt, Hyatt and
Hyatt Regency brands in the country.
In September 9, 2011, Hyatt Hotels Corporation announced that
a Hyatt affiliate had entered into
management agreements with the Russian state-owned company
OlSe "Nash Dorn-Primorye'' for two
new Hyatt botels in the Russian city of Vladivostok, which was
one of the main harbours and trading
gateways of Russia's Far East and served as start and end points
on the Trans-Siberian Railway. The
Hyatt Regency Vladivostok Golden Horn and Hyatt Vladivostok
Burny, which would be the third and
47. fourth Hyatt-branded hotels in Russia, were under construction
and expected to open in advance of the
Asia-Pacific Economic Cooperation summit in the fall of2012.
The other functioning Hyatt-branded hotels in Russia in 2011
included the upscale full-service hotels
Ararat Park Hyatt Moscow (opened 2002) and Hyatt Regency
Ekaterinburg (opened 2009). Also, the
Hyatt Regency Sochi was under development and slated to open
in 2013 just before the Winter Olympic
Games in the famous Black Sea resort area.
The first Hyatt property in Russia, the Ararat Park Hyatt
Moscow, was built by Moscow-based restoration
and construction firm Lucine. The hotel was built on the site of
a legendary Soviet-era Armenian
restaurant, and it recalled its predecessor not only in name but
also with ethnic touches: artwork by
contemporary Armenian artists, a depiction of an Armenian
fertility goddess in the atrium, an Armenian
chapel with a priest on call and, of course, Cafe Ararat, which
dished up satisfying Armenian fare.'
Other Hyatt-branded hotels were operating or under
development in the Commonwealth of Independent
48. States, which was establishing itself as both a force in
international business and an attractive tourist
destination.
UPSCALE SELECT·SERVICE HOTEL CATEGORY
The upscale select-service hotel category experienced
significant growth until 20 II. Hotel chains with
that category services were actively growing by increasing their
hotel capacity and among them were
Courtyard by Marriott, Hilton Garden Inn and Wingate Inn. For
example, Courtyard had increased its
hotel capacity from 99,669 rooms in 2006 to 131,069 rooms in
2011 and was 11th among the top
worldwide hotel brands with the greatest number of rooms (see
Exhibit 8)."
Courtyard by Marriott
Marriott spent $2 billion in the mid-1980s on building up the
Courtyard by Marriott chain in order to
target Holiday Inn's clientele." The first Courtyard location was
opened in 1983, aft,;r th~ee years of
research and planning. The two-story, 150-room Courtyard hotel
near Atlanta, Georgia, did not offer
49. bellmen, room service or large meeting and banquet facilities,
but did offer the high-quality rooms for
which the chain was known.
9 -Ararat Park Hyatt Moscow,· concieroe.com.
www.concierge.comltravelguidelmoscowl11otelsl2851. accessed
May 17,
2014.
10 G. Pap/ryan, op. cit. .
11 Leslie Smith, 'Marriott Stakes Out Hotel Territory, U The
New York TImes, September 22, 1985, F1.
202 International Business Strategy
9B14M070
Page 4
Courtyard by Marriott, a hotel chain of upscale mid-priced
hotels designed for both business and leisure
travelers, was in 2006 operating 692 hotels in 42 states in the
United States and m 22 countnes and
territories worldwide and was 13th among the top worldwide
hotel brands with the greatest number of
50. rooms."
At that time, the brand offered more than 10,000 rooms outside
the United States. For example, there
were 27 Courtyard by Marriott properties operating in eight
countries in continental Europe, It w~s
Marriott's fastest-growing brand, and Marriott was planning to
locate two of every five new Courtyards 10
the next three years outside the continental United States.
In India, Courtyard by Marriott opened its first hotel in Chennai
in 2006 and in 20 II was among
Marriott's 15 operational hotels in India. The Courtyard brand
accounted for nearly half of these. Another
18 Courtyard hotels in smaller towns and satellite cities were
under construction.
In 20 II, Marriott launched two new hotels under its Courtyard
brand in Russia. One was in the historic
city of Kazan and the other was in the Siberian city of Irkutsk.
Also, atthe end of the year, the opening of
the second Moscow-based Courtyard hotel, which would be the
brand's sixth location in the Russian
market, was planned. "We are excited about the expansion of
our Courtyard by Marriott brand in Eastern
51. Europe and see strong opportunity to grow the brand here. Last
year we announced our goal to double our
presence in Europe by 2015," said Amy McPherson, president
and managing director of Marriott
International in Europe."
On February 10,2009, Marriott opened the 800th Courtyard by
Marriott hotel, this one in Shanghai. This
was the company's seventh Courtyard in China. By the end
of2010, Courtyard by Marriott's porrfolio in
China consisted of eight hotels totaling 2,474 rooms.
Hilton Garden Inn
The Hilton Garden Inn brand began in the late 1980s under the
name CrestHili by Hilton in four hotels in
different U.S. cities. In 1996, Hilton Worldwide reintroduced
the brand as Hilton Garden Inn which at
th~ time operated over 500properties. The brand,like its
competitor Courtyard by Marriott, operated mid-
priced hotels that were designed for both bus mess and leisure
travelers,
Hilton opened its first Hilton Garden Inn hotels outside the
United States in Stuttgart, Germany, and
52. Florence, Italy, on September 19,2006, and October 21, 2006,
respectively.
This segment of the hotel industry was highly competitive but
according to Adrian K th I b I h d
f H'I G d I" h ' urre, ego a ea
0H IIton .dar':Mndnn,. Rdeshearc
i
shows there is increased demand by travelers for this type of
product."
e a so Sal, I -pnce ote s currently offer the greatest development
0 rt . < hei fr h·
rt
,,14 ppo unity ror t err anc ise
pa ners,
Ian Carter, executive vice-president of Hilton Hotels
Corporation told R . . I· "Th
I
.. f . . ,USSlan journa rsts e
peel! ranty 0 our strategy IS that we do not invest in property
53. We cho rtn 'f' ase pa ers - the owners 0
12 G, Papiryan, op. cit.
fJ ~Courtyard by .Marriott Continues Expansion in Russia, n
Marriott News Cent
http://news.mamott.coml2011102Icourlyard-by-marrioft-
.eonfinues..ex an' 'er; Fe~ruary 16, 2011,
14 Hilton Garden Inn Media Center,
www.hgimediacentercomacceSPSedSJlon.m.rus2s/a.html.
accessed May 17,2014.
" anuary 7, 2014.
&-----------------
__ ------------------------------ -
.:G:'I~oba~liza~ti~on':.':of'..'H:'.'Y~att~p~ia:::Ce~_1--'KiL.J----
--..+-
Page 5 9814M070
building~ - to cont.inue working with them as a management
company or with franchise agreement. In
54. fact, we mvest only m humans and are looking for partners that
invest in the buitding.''"
In the future, the brand's leadership planned to use a hub-and-
spoke approach, as this would expedite
development In key target markets. The plan was to be
completely reliant on franchising to grow the
brand, and then encourage owners to use Hilton Worldwide's
management division to operate the
properties."
Looking at the huge opportunities in terms of business travel in
the Asia-Pacific region, especially in
emerging economies such as India and China, the leadership of
Hilton made a decision to bring the Hilton
Garden Inn to these countries. In May 2010, the Hilton Garden
Inn New Delhi became the first hotel from
this brand launched in India.
In February 2011, tbe Hilton Garden Inn signed a management
agreement with Zhejiang Jiacheng
Holding Group to manage the first Hilton Garden Inn in China -
a 137-room conversion project in
Shaoxing.
55. By 2011, the Hilton Garden Inn brand had become one of the
fastest-growing brands in the hospitality
industry. It operated more than 510 properties around the world
and had more than 100 properties planned
or under development in the United States, Canada, Chile,
India, the United Kingdom, Saudi Arabia and
Poland.
Wingate Itttt
The first Wingate Inn franchised hotel opened in July 1996.
Since then, all Wingate Inn hotels had been
independently owned and operated under franchise agreements
with the hotel chain Wingate Inns
International, Inc" a subsidiary of Cendant Corporation. The
brand focused its service on the upper-mid
market and offered consumer-based technology and
comfortable, oversized rooms that were created in
response to business travelers' needs.
When in the summer of 200 I Wingate Inn opened its first non-
U.S.-based property in Calgary, Canada,
the president and CEO of Wingate Inns International, Keith 1.
Pierce, said, "This opening in Calgary just
gets the ball rolling on our international development. We are
56. planning to build nine new Wingate Inn
hotels in Canada over the next nine years. We would like to see
additional international development in
places such as South America, Europe and the Philippines.v'"
However, these plans were not realized. In
2007, the Wingate Inn brand affiliated itself with the Wyndham
Hotels and Resorts brand and officially
changed its name to Wingate by Wyndham.
Hyatt Place
In December 2004, Global Hyatt Corporation, with its existing
portfolio of214 upper upscale and luxury
hotels in 43 countries around the world, announced that it would
acquire AmeriSuites, an upscale chain of
all-suite business-class hotels, from affiliates of the Blackstone
Group. "The addition of this leading,
1.5 E. Shuvalova, NLoud Names: Hilton Way in Russia,·
Vedomosti. October 22, 2007. N199, (in Russian).. .
1(1 "Hilton Garden Inn Expands its Horizons, R Hotel News
Now. March 28, 2011,
W'NW.hotelnewsnow.comiArtlcle/5246/f-lJlfon-
Garden_Inn_expands~its_horizons#Sthash.GsAT066L.dPuf,
Bcc.essed May 17, 201~. .
57. 17 'Wingate Inn Hoteis Go Intemational as Brand Opens Hotel
In Calgary. Canada, WiredHoteller.com. August 8, 2001.
www.wiredhoteJier.cominewsl4008769.html. accessed May
17,2014.
204 International Business Strategy
Page 6
9B14M070
upscale limited service entity will enable us to create a new
brand extension that will benefit ~he Hyatt
brand and the owners and customers of our existing hotels, as
well as the owners, franc~lse~: and
customers of AmeriSuites," said Thomas Pritzker, chairman and
CEO of Global Hyatt Corporalion.
To implement the AmeriSuites strategy for Hyatt, industry
veterans Jim Abrahamson and Mike Leven
were appointed as the company's senior managers. Before
joining Hyatt, Abrahamson had spent 13 years
with Hilton in its franchising, development and operating
groups. Among his o~h~r respo~sJbllltJes at
58. Hilton, Abrahamson had led the creation, development,
implementation and franchising of Hilton Garden
Inn. Leven previously served as president and chief operating
officer of Holiday Inn Worldwide and .as
president of Days Inn of America. At Hyatt, Leven would be
responsible for the provision of high-quality
franchise services to AmeriSuites franchisees.
Following the acquisition of the AmeriSuites hotel chain in
January 2005, senior executives and design
teams at Hyatt Hotels Corporation, along with industry-leading
architects, interior designers and brand
consultants, set out to revitalize the chain and launch a new
leading-edge hotel concept in the upscale
select-service segment. The renovation and repositioning of
existing AmeriSuites hotels into Hyatt Place
hotels began in the fourth quarter of 2005, with the rebranding
of qualified corporate and franchised
hotels due for completion in early 2007.
In 20 II, Hyatt Hotels Corporation led the development effort
for newly built Hyatt Place properties and
the new brand operated about 170 properties with 20,434 rooms
in the United States (see Exhibit 8).
59. HYATT HOTELS CORPORATION'S MARKET EXPANSION
STRATEGY
Hyatt Hotels Corporation intended to expand the presence of all
its brands in attractive markets
worldwide. First, the company wanted to focus its expansion
efforts on under-penetrated markets where it
already had an established presence and on locations to which
its guests were traveling but where it did
not have a presence. Hyatt Hotels Corporation was planning to
expand its presence by increasing the
number of hotels under the Hyatt brand affiliation, primarily by
entering into new management and
franchising agreements.
Hyatt Hotels Corporation made significant progress in
expanding its presence in 2010 through the
development of new hotels and co~verslon .of existmg hotels.
For example, in New York City, the
company op~ned two Andaz properties and signed contracts for
new properties, which would expand its
presence .to SIX hotels. Also, the company announced five
conversions of existing hotels in North America
to four different Hyatt brands. In 20 I0, Hyatt Hotels
Corporation continued to grow its presence in India
60. and announced development plans to expand into 15 new Indian
markets over the next five years.
In 20 II, Hyatt Hotels Corporation intended to establish and
expand its select-service Hyatt Place and
Hyatt Summerfield SUites brands worldwide, The company
intended to grow it It'" 1 S se ec -servrce presence
through the construction of new franchised properties by third-
party develo h . d. f .. H' pers, t e conversion an
renovation a existmg non- yatt properties, and in certain cases
participati . th d I f. h Id b d ' ,Ion 111 e eve opment 0
properties t at wou e manage by Hyatt Hotels Corporation's
brands.
18 -Hyatt Corporation Announces Acquisition of AmeriSuites
Hotels· Formatio .
hospitalitynet December 9, 2004,
www.hoSPltalitynet.orglneWsl4021529htlnOfGIObal Hyatt
Corporation Progresses,-
. m, accessed May 17, 2014.
-----------------
61. --
_---------------------------------
_..:G~IO~b~.~IIZ~.'."ti.".on~of~H~y~.tt~p~'.~ce=__I:...-
'2~O!:5L...J--------t
Page 7 9B14M070
During the year ended December 31, 20I0, Hyatt Hotels
Corporation opened 16 new Hyatt Place hotels
and fo~r new Hyatt Summerfield Suites hotels in North
America, most of which were franchised
properties. The company also announced 15 Hyatt Place hotels
under development in India and Panama.
Hyatt Hotels Corporation intended to increase its franchised
hotel presence for its Hyatt and Hyatt
Regency brands too, primarily in North America. The company's
management declared, "By increasing
our focus on franchising, we believe that we will gain access to
capital from developers and property
owners that specifically target franchising business
opportunities. To pursue this strategy, we have
established an internal team dedicated to supporting our
franchise owners and to driving the expansion of
62. our franchised hotel presence. We plan to expand existing
relationships and develop new relationships
with franchisees who demonstrate an ability to provide
excellent customer service while maintaining our
brand standards."!"
In the hotel business, it was widespread to receive contracts for
management, but many well-known
players, especially players that operated low-category hotels,
were using franchising agreements during
their global expansion. While a management contract does not
involve as high risk and can yield higher
returns for the company, a franchising agreement involves lower
levels of resource commitment, and
levels of control are less, but returns are lower, as a significant
part of income is returned to the
francbisee.
In the beginning of2011, Hyatt Hotel Corporation had 132
franchised hotels, four of which the company
previously managed itself. In the same period the previous year,
the company's franchised hotels totalled
109.
In 2011, Hyatt Hotels Corporation also sought to acquire other
63. brands or hospitality management or
franchising companies as part of its efforts to expand its
presence. "These acquisitions may include hotel
real estate. We expect to focus on acquisitions that complement
our ability to serve our existing customer
base and enhance customer preference by providing a greater
selection of locations, properties and
services. Furthermore, we may pursue these opportunities in
alliance with existing or prospective owners
of managed or franchised properties to strengthen our brand
presence," the company's management
explained."
Greenfield start-ups and joint ventures might also strengthen the
company's presence in markets. As well,
joint ventures might have benefits in terms of higher returns for
the company than franchising.
In 20 II, Hyatt Hotel Corporation started to expand some of its
service brands internationally and to select
countries to enter (see Exhibit 9). The company's management
announced, "We believe that the
opportunity for properties that provide a select offering of
services at a lower price point than full service
hotel alternatives is particularly compelling in certain emerging
64. markets, such as Brazil, lndia, China and
the Middle East, where there is a large and growing middle
class along with a meaningful number of local
business travelers.,,21
192010 Annual Report, Hyatt Hotels Corporation,
http://investors.hyatt.comlphoenix.zhtmI7c=228969&p=irol-
reportsannua/,
accessed May 17,2014.
20 Ibid.
21 Ibid.
206 International Busine,~s~sS~tr~a~te~gy~ _
9B14M070
PageS
EXHIBIT 1: TOP TEN WORLDWIDE HOTEL GROUPS WITH
THE GREATEST
NUMBER OF ROOMS AS OF JANUARY 1, 2011
Rank Group Hotels Growth
Rooms Growth
66. Source: Database MKG Hospitality. March 2011,
www.hotel~online.comlNewslPR2011_2ndlApr11_HoteIRankin
gs.htm/.
accessed May 17,2014.
EXHIBIT 2: ROOMS BY BRANDS OF HHC ('!o)
Brands Hyatt Grand Hyatt Hyatt Park Hyatt Hyatt Andaz
Regency Hyatt Place Hyatt Summerfield Residence
Suites Club
Rooms 53 17 16 4 4 4 2 <1
Source: Annual Report of Hyatt Hotel Corporation, 2010,
http://investors.hyatt.comlphoenix.zhtm'?c=22B969&p=irol~
reportsannua, accessed May 17,2014.
EXHIBIT 3: HHC ROOMS BY REGION ('!o)
Regions North Asia Pacific Europe, Southwest Other
America Middle East Asia Americas
and Africa
Rooms 71 16 7 4 2
67. Source: Annual Report of Hyatt Hotel Corporation, 2010,
http://investors.hyatt.comiphoenix.zhtmf?c=22B969&p=iro/.
reportsannua, accessed May 17, 2014.
EXHIBIT 4: HHC ROOMS BY TYPE ('!o)
Types Managed Owned Franchised Unconsolidated Residential
and Hospitality
Vacation
Leased Venture
Property Ownership
Rooms 53 21 16 8 1 1
Source. Annual Report of Hyatt Hotel Corporation, 2010, htt
reportsannua, accessed May 17, 2014.
p:J/investors.hyatt,COmiphoenjx.zhtml?c=22B969&P=irol~
." ....----------------
Globalization of.:.:H::ya::.tt.:.:p.:.:la::.ce=---I_'"20"7_..1
68. Page 9 9B14M070
EXHIBIT 5: SELECT FINANCIAL DATA OF HHC (IN $
MILLIONS)
Net Income
708
168 -43 66
628 687 406 476AdlUsted EBITDA
2006 2007 2008 2009 2010
315 270
Management and
Franchisinn Fees
278 315 290 223 255
Source: Annual Report of Hyatt Hotel Corporation, 2010,
http://invesfors.hyatt,comlphoenix.zhtml?c=228969&p=irol.
reportsannua, accessed May 17,2014,
EXHIBIT 6: SUMMARY OF HHC MANAGED, FRANCHISED
AND OWNED AND LEASED HOTELS
69. AND RESIDENTIAL AND VACATION OWNERSHIP
PROPERTIES
BY SEGMENT FOR 2006 AND 2010
Included in the summary above are the following owned and
leased properties:
December 31 2010 December 31 2006
PrOnerlies Rooms Prooerlles Rooms
Owned and Leased
Full-service Owned and Leased
North America 32 16840 35 17,253
International 10 2,607 10 2,612
Select-service Owned and 54 7,041 64 8,398
Leased
Total Owned and Leased 96 26488 109 28263
Source: Annual Report of Hyatt Hotel Corporation, 2010,
http://investors.hyatt.comlphoenix,zhtml?c=228969&p=irol-
reporlsannua, accessed May 17, 2014,
70. 208 Internatio'."n~.I~B~u~sin~e=s~sS~t~r.~te~g~y -.------------
----
Page 10
9814M070
EXHIBIT 7: DESCRIPTION OF HHC'S BRANDS
Brand Segment Customer Base % of Total Roomsl
Rooms! Select Key Locations
Rooms! Units Units (Inter Competitors
Units (North national)
America)
Park Full Service! Individual busines 4 1,279 3,770
Four Seasons, Buenos Aires,
Hyatt Luxury and leisure Ritz·Carlton, Paris,
travelers; small Peninsula, St. Shanghai,
71. meetings Regis, Sydney,
Mandarin Washington,
Oriental D.C.
Andaz Full Service! Individual busines <1 829 267 W,
Mondrian, New York,
Upper and leisure The Standard London, Los
Upscale travelers; small Angeles, San
meatlnqs Dieoo
Grand Full Servicel Individual business 17 8,237 13,331
Mandarin Beijing, Berlin,
Hyatt Upper and leisure Oriental, Dubai, Hon9
Hotels Upscale travelers; large Shangri-La, Kong, New
and small InterConti- York, Tokyo
meetings, social nental,
events Fairmont
Hyatt Full Service! Conventions; 53 48,976 18,139 Marriott,
Baston, Delhi,
Regency Upper business and Sheraton, Landon, Los
Hotels Upscale leisure travelers; HiIlon, Angeles, San
72. large and small Renaissance, Francisco
meetings, social Westin
events;
associations
Hyatt Full Service! Business and 4 5,462 0 Marriott, Seattle,
Upper leisure travelers; HiIlon, Suburban Los
Upscale small meetings InterConti- Angeles, San
nental, Francisco, Key
Westin, West
independent
and boutique
Hyatt Select
hotels
Individual business 16 20,434 0 Courtyard byPlace Service! and
leisure
Atlanta, Dallas,
Upscale travelers; small
Marriott, Hilton Houston,
73. meetinns Garden Inn Miami, Phoenix
Hyatt Select Extended stay 4 4,582 0summer- Service! guests;
individual Residence Inn Austin, Boston,
field Extended business and by Marriott, Dallas, Miami,
Suites Stay leisure travellers; Homewood San Francisco
families, small Suites
meetinos!traininns
Hyatt Vacation Owners of 2 962Resi- Ownership! vacation
units; 1,239 Hilton Grand Aspen, Beaver
donee Branded repeat Hyatt Ivacation Club, Creek, Cannel,
Club Residential business and Marriott Key West,
leisure guests rvacation ClUb, Siesta Key,
Starwood Dubai,
Vacation Fukuoka,
Note: ~ of Total Rooms/Units, Ro~mslUnits (North Amen'ca
Ownershin Mumbai
Source. Hyatt Hotel CorporatIOn Annual Report,
reponsannua, accessed May 17, 2014 .
74. ) and RoomslUn r (I t .2010 htt 'j, IS n ernat/onal) are as of
December 31, 2010,
, p, 'linvestors.hyatt.comlphoenix,zhtml?c=228969&P=irol.
.,...---------------
Globalization of Hyatt Place
:":"-"'=--+-I!<l~....l200
Page 11 9B14M070
EXHIBIT 8: TOP TWENTY WORLDWIDE HOTEL BRANDS
WITH THE GREATEST
NUMBER OF ROOMS AS OF JANUARY 1, 2011
Rank Hotels Evolution Rooms Evolution
(2011) Hotels (2011) (~ooms ('1;)1
(2010-2011 2010-2011
1 Best Western 4,015 -33 307155 -0.4
2 Holidav Inn 1,247 -72 230,117 -4.3
3 Marriott Hotels & Resorts 554 9 204,019 2.6
4 Comfort Inns & Comfort 2,621 18 202,132 0.5
76. Source: Database MKG Hospitality, March 2011, Vv"vVW.
hotel-online. comlNewslPR2011_ 2ndlApr11_ Hote/Ranklngs.
htm/,
accessed May 17,2014.
EXHIBIT 9: KEY INDICATORS IN SELECT TARGET
COUNTRIES
India China Russia Armenia Brazil Mexico Costa Panama
Rica
Population 1,193 1,336 143 33 196 114 46 35
(millionsl
GDP/Capita (US$) 3,600 7,800 16,100 5,300 11,500 14,600
11,700 13,100
Inflation Rate ('!o) 96 5.5 8.4 76 6.6 3.4 4.9 5.9
2011 Index of 124 135 143 36 113 48 49 59
Economic
Freedom ratina
Source: "The World Factbook, N Central Intelligence Agency,
https:llwww.cia.govAibrarylpub/icationslthe-world·
factbook/index.htm/, accessed December 7, 2013; "Highlights of
77. the 2011 Index of Economic Freedom," The Heritage
Foundation,
vvww.herltage.orglindexlpdfl2011Iindex2011_highllghts.pdf.
accessed December 7, 2013.
---
_------------------------ __ ..:s:'.'TA~R~B~UC::K::S~'F:,:"ORAY
INTO TEA-DRINKING INDIA
313-186-1
ICMR
16SCenfer fOf Monogemonl Rtlearch
~oDrg
IBSCenter tor Management Research
starbucks' Foray into Tea-Drinking India
This case was written by Syed Abdul Samad, under the direction
of Debaprotfm Purkayastho, IBS
79. Atll of tht world
I +44 (011234 7509(13
f +4410)1234 751125
t Infolt!hK._tf!t.Org
212 pnv __ -------International BusinessStrat~
313-186-1
ICMR
IBSConlllllor Management aeeecn
www lI;:mlrndlo org
Starbucks' Foray into Tea-Drinking India
"We have studied and evaluated the market carefully toenSllre
we are enfe.ri,ng
India the most respectful way. We believe the size of the
economy '. the rtstng
spending power and the growth of cafe culture hold strong.
pOlentl~1 for Ollr
growth and we are thrilled to be here and extend our
80. ~lgh.qllahty coJ!ee,
handcrafted beverages, locally relevant food, legendary se-wce,
and the umque
, I "IStarbucks Experience to customers ere.
"! don't think we're late to the game. We are very optimistic and
ve,y bullish on
the opportunity that exists in india. ,,2
John Culver, President, Starbucks Coffee China and Asia
Pacific.
On October 19,2012 Starbucks Corporation (Starbucks) opened
its first store in India and soon
followed it up with 8 'more stores. Starbucks Corporation and
Tats Global Beverages Limited had
set up a 50-50 joint venture company, Tata Starbucks Limited,
to establish the Starbucks coff:e
outlets. Though India was predominantly a tea drinking nation,
Starbucks had ta~ted success. 10
China (also a tea drinking nation) and this had encouraged the
company to enter into the lndian
cafe market.
Star bucks, based in Seattle, Washington, US, was the largest
81. coffee house company in the world. It
had expanded its presence allover the world including North
America, South America, Europe,
Australia, and Asia. Since 2006, the company had been trying to
enter into the Indian market.
However, with FOr restrictions" (then limited up to 51%)
preventing it from entering the country, it
had to postpone its entry. However, in 201 1, the company
signed an MoV with India's Tara Group
(Tata) to explore the possibilities of making its entry into the
country. In January 2012, the company
entered into a 50-50 joint venture with Tata and in October
2012, it set up its first outlet in India. By
March 2013, the store numbers in the country had grown to
nine. While the initial consumer
response to its stores was good, Starbucks faced a few
challenges in the Indian market such as
competition fr?~ organized and .u.norganiz~d coffee (an~ t~)
shops, finding the proper locations and
talent pool, pricmg, a~d competitive branding and positioning
from its competitors, In the words of
Howard Schultz, Chairman and CEO, Starbucks, "The coffee
market here is ferocious in terms of
competition, There are so many players trying to do what we
think we can do better ."J
82. ABOUT STARBUCKS
On March 30, 1971, Jerry Baldwin, Zev Siegl, and Gordon
Bowker started Starbucks in Seattle,
However, the company only sold high quality roasted coffee
beans then, and not brewed coffee.
By 1982, the company had set up five stores, a small roasting
facility, and a wholesale business
that sold coffee to local restaurants, The same year, Howard
Schultz (Schultz) joined Sterbucks as
Foreign Deirect Investment (FOI) was introduced in India in
1991und F ' E h
.. er -orergn xc ange ManagementAct (FEMA). However, pnor
(0 January 24,2006 FDI was not 'U,Il0' d i 'I' '2006
" lid' h . ' nze tn rete, mg But smce ,FDI up to 51/0 was a owe
Wit prior approval of Foreign Investme t Pr·· '1
trade of'Single Brand' products, subject (0 Press Note 3 (2006
Sert n 1n Januar Board (FLPB) for retat
raised the FDllimit in single-brand retail to 100% and to 51o/r
in lc1s~'brndanuw:y2012, the government
o mu n- an retail.
83. 2
_--------------------- STARBUCKS' FORAY INTO TEA-
DRINKING INDIA
313-186-1
manager of retail ~ales and marketing. During one of his
business trips, he noticed the coffee bar
culture prevalent m Italy. After returning home, he tried to sell
the idea of a national chain of
coffee bars to the Starbucks owners. However, they were not
interested in the restaurant business.
So, in April 1985, Schultz opened a coffee bar himself and
named II Giornale. He served
Star~ucks coffee there. With the instant success of II Giomale,
Schultz began expanding his chain
and m 1987, he bought Starbucks for $4 million. He then
renamed II Giomale as Starbucks and
expanded the chain despite incurring losses till 1990, In 1991J
Srarbucks' sales improved by 84%
and the company turned profitable. In 1992, it went public and
84. the aggressive expansion
continued. Starbucks grew from 17 coffee shops in 1987 to
20,891 stores in 62 countries by March
2013, including 13,279 in the US and 1,324 in Canada' (Refer to
Exhibit I for Starbucks
presence across the globe).
By April 2013, Starbucks had become the world's largest coffee
house chain, serving hot and cold
beverages, whole-bean coffee, microground instant coffee, full-
leaf teas, pastries, snacks,
packaged food items, hot and cold sandwiches, and items such
as mugs and tumblers. Some of the
Starbucks evening locations also offered beers, wines, and
appetizers. More than the offerings, the
company focused on selling a 'third place' experience, and the
stores became places for relaxation,
chatting with friends, reading the newspaper, holding business
meetings, or browsing the Web.
The 'experience' brought spectacular success for the store. For
the year end September 30, 2012,
Starbucks had earned revenue ofUS$ 13.29 billion and a net
income of US$ 1.38 billion" (Refer
to Exhibit II for Starbucks' financial data).
85. STARBUCKS AND GLOBALIZATION
Since it was set up in 1971, Starbucks had been expanding in
Seattle and by 1986, it had opened 6
stores. However, after Schultz took over the company in 1987,
the expansion was more rapid and
Starbucks opened its first locations outside Seattle at
Waterfront Station in Vancouver, British
Columbia, and Chicago, Illinois. In March the same year,
Starbucks ventured outside the US and
established its first international store at the Seabus Skytrain
Station in Vancouver, Canada. By
1989, the store numbers had increased to 46, covering the
Northwest and Midwest regions. By the
time the company went public in 1992, it had grown to 140
stores in North America.
As its business grew internationally, Starbucks organized its
business into two operating segments:
North American and International. In 1995, Starbucks set up a
wholly owned subsidiary called
Starbucks Coffee International to manage its businesses outside
North America, including
opening company-owned, licensed, and joint-venture-based
retail stores worldwide. By then, the
86. company had grown to over 700 stores in North America. Once
the subsidiary was established,
Starbucks began exploring foreign opportunities. Its first store
outside North America was opened
in Tokyo, Japan, in 1996. It was set up as a 50-50 joint venture
partnership with a local retailer,
Sazaby Inc. The Starbucks format was licensed to the joint
venture which was given the
responsibility to expand the store network and the Starbucks
experience in Japan. All the store
managers and employees were trained. Some US employees
were transferred to the Japanese
operations to make sure that it replicated the Starbucks
experience in its stores and by 2009 there
were around 850 profitable Starbucks stores in Japan.
Apart [TOmjoint ventures, alliances, licensing, and franchising
agreements, Starbucks also took the
inorganic route for its globalization and made some acquisitions
to expand its presence in various
countries. To establish itself in the UK, it purchased Seattle
Coffee Company, a British coffee
chain with 60 retail stores, for $84 million in 1998. It also
experimented with eateries through
Circadia, a restaurant chain in the San Francisco Bay area. The
locations were soon converted into
87. Starbucks cates. Later, it opened stores in Taiwan, China,
Singapore, Thailand, New Zealand,
South Korea and Malaysia, mostly by licensing its format to the
local companies in return for a
licensing fee' and royalty over the sales. In th~ early 20.00s, it
pu~sued a? .aggressive e~pans~on
strategy in Europe. As a part of the strategy, 10 2002, It entered
IOtOa JOlOt venture (licensing
3
213
214 International Business Strategy
313-186-1
format) with Bon Appetit Group, SWitzer,land'S largest food
service .comp~ny. to hopen Star?uc~
stores in Switzerland. This venture was followed by joint
ventures 10 various at er countries In
Europe.
In September 2002, Starbucks entered into Latin America by
88. opening its first store in Mexico City.
In October 2002 it established a coffee trading company to
carry out purchases of green coffee
, L Swit I d In April 2003 it acquired 50 stores of Seattle's
Best10 ausanne, WI zer an ., . h
Coffee and Torrefazione Italia from AFC Enterprises for $72m.
Later that year, in August, t e
company opened its first South American store in Lima, Peru. In
September 2006, ~larbu.cks
bought the Diedrich Coffee and Coffee People stores. from
Diedrich Coffe~ based In lrvine,
California, US. In September 2007, it entered into
RUSSia.Starbucks also. acquired Teavana - an
Atlanta, US-based specialty tea and tea accessory retailer - for
$620 million on December 31,
202,
Starbucks had grown its global footprint not just by selling
coffee, but by offering an ex~erience at
its outlets characterized by a strong aroma of coffee, a laid-back
atmosphere, and the rich taste of
its coffee varieties. It differentiated its product and experience
from that of its competitors. It also
protected itself through the use of intellectual property laws.
For instance, when Starbucks opened
89. its first cafe in China in 1999, it registered its major trademarks
in China, including its Chinese
name, 'Xingbake', which meant and sounded like 'Starbucks'
when pronounced. When rival
companies - Shanghai Xingbake Cafe Corp, Ltd. and Qingdao
Xingbake Coffee Shop Company
Limited - began imitating Starbucks' business practices,
products, names, and logos, Starbucks
filed suits against both companies claiming that they were
infringing on its trademarks. After
hearing arguments on the registered trademarks and their usage,
the Chinese court favored
Starbucks. The company also tried to protect its intellectual
property rights in Ethiopia, the
birthplace of coffee. The government of Ethiopia wanted to
trademark the names of its three
coffee-growing regions - Ylrgacheffe, Harrar, and Sidamo - and
sell its beans through licensing
agreements to companies like Starbucks and gain higher prices
for its produce. Starbucks had
earlier registered and used the region name in its coffee brand
'Shirkina Sun-Dried Sidamo' and
objected to Ethiopia's trademarking of a geographical region.
Starbucks argued that Ethiopia
should use geographic certification, which allowed companies
90. to use the name in their branding.
However, Ethiopia acquired the trademark and both sides agreed
to sign a licensing and marketing
deal. While globalization helped Starbucks achieve volumes,
intellectual property laws helped it in
keeping its volumes steady all through these years.
Starbucks achieved global success by adapting itself to the
needs of the local customers. When it
entered international markets, it adopted the same business
model and strategies that it had in the
US. However, it soon learnt that it had to adapt itself to the
cultural differences, retail practices,
and customer preferences of the country it entered. Jim Donald,
CEO of Starbucks from 2005-
2008, said ''The peak time in China is not 7 to 10 in the
morning; it is 4 to 6 in the afternoon. And
t~er~ are also food preferences w,ehad to adapt to. There is the
holiday Yorkshire pudding that is
big In the ~K but does not ~ork In New York. Breakfast
sandwiches in Germany, for example, are
made up With a hard roll With sausage and tomato and served
cold. So we listen hard to what our
partners in a region say.,,6
91. In China - despite rising labor and real estate costs and
increased competition from local and
western food and beverage brands such as Dunkin' Donuts,
Krispy Kreme, and Burger King _
St~bllcks managed to earn m~re ~rofit p~r outlet than in the
US, though sales were less. The
critical suc~ess factor was 10cahz~tJon. Chlna ~lasa tea-
drinking nation and would not give up its
~ulture easily. Henc~, Starbucks did not.advertise or promote
its products as the Chinese perceived
It as a threat to th,elr culture. Instead, It selected high-visibility
and high t ffi I ti for it. '. - ra IC oca IOns lor 1 s
stores to create Its brand Image. And Instead of forcing the
Chin ese It' octa ry alit ItS pr ucts,
Starbucks developed flavors such as green tea-flavored coffee
drinks that I d I I. . . appea e to oca tastes.
Belinda Wong, president of Starbucks China, said "We don't do
one size fits a11".7 With the
4
_------------------------- :sT~A~RBUCKS'FORAY INTO TEA-
DRINKING INDIA
92. 313-186-1
company following such localization, the sales of coffee in
China increased by 20% in 2011 over
2010, reaching 6.25 billion yuan ($995 million)' (Refer to
Exhibit 111value of coffee retailed in
eh.ina). Sl~rb~cks brought its best employees from established
markets to train its employees in
China to give Its customers the Starbucks experience. In place
of take-out orders it promoted the
dine-in service by providing a comfortable air conditioned
environment - though this decreased
the revenue per square meter. However, this relative cut in
revenue was offset by the company
positioning its products as aspirational purchases and pricing
them higher than in the US, as
Starbucks was seen as a status symbol. Apart from these, the
company chose its partners wisely so
as to reach the local customers, as China was not a
homogeneous market and its culture differed
with every region. It partnered with three regional players -
Beijing Mei Da coffee company
(north), Taiwan-based Uni-President (east), Hong Kong-based
Maxim's Caterers (south) - where
93. each brought in their strengths and local expertise, thereby
helping Starbucks to expand quickly in
the Chinese market. Starbucks further intended to open 1500
stores by 2015 in China.
Starbucks had been regarded as a poster child of globalization.
While some considered it an
example of excellence in globalizing strategies, others like the
anti-globalization movement
considered it a poster child for the problems posed by it while
globalizing. Several online activist
groups criticized the company's fair-trade policies (purported
monopoly on the global coffee-bean
market), labor relations, and environmental impact, and held it
up as an example of US cultural
and economic imperialism. For instance, it opened its first
outlet in Israel in August 200 I and by
April 2003 it had to back out from the country. It closed down
its 6 outlets in Israel due to the anti-
American sentiment prevailing in that country. The company
also faced problems on the Arab
front as a campaign to boycott American goods was underway
across the region due 10 the pro-
Israel sentiments of the company's Chief Executive, Howard
Shultz. However, as of 2013, the
94. company was operating successfully in countries like Saudi
Arabia, Kuwait, Bahrain, Oman,
Qatar, and the United Arab Emirates.
Starbucks did not plan any advertising, promotions, or
marketing strategies (except some online
sponsoring) in any of its markets, preferring instead to choose
high-visibility and high-traffic cafe
locations that marketed themselves. However, Starbucks built
up a strong community of die-hard
supporters, who were convinced that the coffee they were
buying was special. The company used
social media platforms like Twitter to build the community.
Along with its expanding global
footprint, Starbucks also embraced ethical sourcing policies and
environmental responsibility.
Since 2000, the company started purchasing Fair Trade
Certified coffee to empower small-scale
farmers to compete in the global marketplace. By 2010, 75% of
the coffee it purchased was Fair
Trade Certified, and the company planned to increase that to
100% by 2015.
INDIAN COFFEE MARKET
95. India was the sixth largest coffee producer in the world with a
4%9 share of global coffee
production. The production was mainly confined to the southern
states of the country - Karnataka,
Kerala, and Tamil Nadu and it was consumed mostly in the
southern parts of the country. But
relatively speaking, India consumed a very tiny volume for a
population of 1.2 billion. India
represented only 1.4%10 of global coffee demand with a per
capita consumption of coffee of just
85 grams, compared to 4.5 kilograms in France, 4.6 kilograms
in Japan, and 6 kilograms in the
us." However, coffee cultivation was beginning to be promoted
in the rural areas of Andhra
Pradesh and the North Eastern states of t.hecountry. The
consumption of coffee too was increasing
across the country.
India had been a tea-drinking society for a long time. It was the
second largest producer of tea after
China producing about 950 million kilograms (28% of global
production, an average of 1991-
20 I013)of tea each year. It was also the world's
larges~consumer of tea, consuming nearly 25~/o.of
the global production. The Indian tea industry was estimated to
have a turnover of Rs. 330 billion
96. by 2015, up from Rs. 195 billion in 2012 with a CAGR of 15%."
5
215
L.....:2::..:1.:6~--1I--.::lnternational Business Strategy
313-186-1
However, the turn of the 2151 century saw a steady increase in
coffee int~ke as the ~oung 8?d
middle-class aspired for more Western tastes. The coffee
c~lture was steadily on the rise. Social
gatherings and group networking embraced the new pracuce of
meeting over coffee at coffee
shops to discuss business and pleasure. The Indian coffee shop
.m.ar~~tgrew at a C~GR o~ 25%
over the past few years and was estimated to add at least 100
million .new co~fee drinkers In t~e
near future, These predictions would result in the potential for
more international and domestic
coffee chains to enter into the country. Three major factors
97. contributed to the growth of the coffee
market in India - rise in disposable incomes among the youth,
lack of alternative hang-outs, .and
the increasing number of new office complexes and colleges.
The market growth could be mainly
attributed to India's growing youth segment. The 2011 estimates
revealed that around 50% of
India's 1.2 billion people were 25 or younger. By 2015, this was
expected to increase to 55%.lS
Coffee shops served as social hubs for the youth segment,
particularly those with steady,
disposable incomes. According to Shripad Nadkarni, managing
director of Market Gate
Consulting, "Coffee chains offer a basic emotional need -
refuge. They were brands between
home and office. ,,16
It was not just local coffee chains that were looking to enter the
Indian coffee market. Foreign
players were excited by India's increasing appetite for outside
food despite rising prices and signs
of an economic slowdown. Since growth and returns were
harder to come by in developed
markets, India became a hot spot for coffee retailers across the
globe. Foreign retailers saw the
98. establishment of the cafe concept in India with the growth of
homegrown brands like Cafe Coffee
Day and Barista. The Indian market seemed attractive to global
coffee retailers as they did not
have to start from scratch. By 2013, the Indian market became
home to multiple coffee brands
including Cafe Coffee Day, Barista Lavazza, Java Green, Costa
Coffee, Starbucks Coffee, and
Gloria Jean's Coffee, but the market was still at a nascent stage.
The organized cafe market in
India which was valued at around Rsb II billion with around
1500 coffee cafes in 2013 was
expected to grow to around Rs. 22,5 billion by 2017,"
India was the fourth largest exporter of robusta beans-after
Vietnam, Brazil, and Indonesia.
However, industry experts opined that the rising cafe culture
and strategies like local procurement
were not only affecting the cafe market but also global demand
and coffee exports might take a
downturn because of the increased local demand. "As more
production is consumed domestically,
it leaves less for eX~OrlS, supporting international prices.""
said Keith Flury, a soft-commodity
an~lyst at Rabobank III London. Ramesh Rajah, president of
99. India's Coffee Exporters Association,
estimated that the costs for growers, including fertilizer, fuel,
and labor, had risen about 40% in the
past two years and its efforts to increase production had failed.
He said, "The likelihood of
increased production meeting rising domestic demand and
sustaining exports is unlikely.t'P
STARBUCKS' FORAY INTO INOlA
INITIAL HICCUPS
In 2006, Starbucks. announced its decision to enter India and
approached the country's Foreign
Investment Promotion Board (PIPB) for this. The company
proposed to " N
H' R 'I (i I' , ' own equity In ewonzon etau, Its lcensee
c
lor rndl~), a JV between Starbucks' Indonesian franchisee VP
Sharma
(Sharma) and FU,ture Group CEO Kishore Biyani (Biyani)
However the a I" iected
h d h he comb! " pp rcanon was rejecteon t e groun stat t e
100. combined stakes of Starbucks and Sharma (h '
.r. . '. W ose investment was also
roreign Investment due to hISNRI status) breached the 51%
FDIIl'm't in ' 1 b d ' ich' , hat ti I I stng e ran retail whicwas III
operation at t at time. In April 2007 the company submitted . d
1" ,, a revise app rcauon steung
b Rs. Represents the Indian Rupee; US$= Rs. 58,15 as 011
JlU1e10,2013
Future Group is an Indian privately held corporation that runs
chains ofla d'
and warehouse stores. It has a number of businesses across the
ret 'I fi rg~ IISCOUIH ~ep~trnellt. stores
au, mancia and service Industries.
6
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